Cain seeks strong sponsors as lending market reboots 

Cain International is looking for strong sponsors as it seeks to allocate debt capital to new acquisitions and developments in the US, said Matthew Rosenfeld, senior vice president and head of US debt at Cain International.  

The continued economic downturn and interest rate spikes seen over the past six months have led some borrowers to resort to short-term loans to “buy time” for executing their business plans or simply waiting until a more favorable interest environment. Cain International’s US debt platform browses projects that it believes hold profound value.  

“We, as a lender, buy into what our sponsors are doing. So, we’re not going to lend to someone on the basis that all they need is time, we need to see a viable exit at the end of that extended period,” said Rosenfeld. “If we believe in the business plan, the market and that the sponsor can deliver, that’s really interesting.”   

Rosenfeld, speaking to Real Estate Capital USA in the wake of the Federal Reserve’s move last week to increase rates by 25 basis points, sees a loosening in the lending market.  

“I don’t think it’s unlocked. But I think people are peering through the keyhole, and to see what’s on the other side,” said Rosenfeld. “Do I think we go back to 2021 levels of liquidity? Not yet. But do I think we come back with a little bit more structure and a little bit more functionality in the lending markets? I do.”  

Rosenfeld noted that construction financing has been compelling for Cain International at the current moment, adding the quality of projects that are coming to market in a very challenged environment is usually higher. “In order to get construction financing done today, in order to capitalize a budget, you need to be a very, very experienced developer and sponsor,” he explained.   

While acknowledging that more institutional lenders are stepping away from office and migrating towards industrial and multifamily, Rosenfeld noted Cain International is also interested in entering “alternative property types” with strong fundamentals.  

“When I say alternatives, I really mean areas of the market that you have to study, understand, and have a deep-rooted conviction in. Life sciences studios, data centers…these are sectors that have a naturally high barrier to entry for many lenders, but can also present very strong ongoing demand fundamentals which we buy into,” he added.  

Except for the basic analysis of sponsors’ financial well-being, Rosenfeld also stressed the team quality behind a construction. “In construction lending we care about partnering with high-quality, experienced partners… it’s critical,” he said. 

2023 lending outlook  

Rosenfeld saw the Federal Reserve’s decision last week to implement a 25-basis point interest rate increase as a “two-act story,” with the remaining question of what will be the long-term rates like and how it will affect the leverage in the debt market.  

“Act one was when are we going to stop raising [rates], and act two is going to be where we end up in terms of terminal rates,” Rosenfeld said. “If you’ve bought something that’s yielding 3 percent, or 4 percent, and your cost of debt is going to remain at 6 percent, that’s still a dilutive and challenging environment to be in,” he added, noting that the negative leverage in real estate is still challenging. 

Rosenfeld sees the public market as a barometer for the liquidity of the debt market. “I do think that if you can get some stabilization in the stock prices of [public real estate] companies, then you’ll be able to see that trickle through the system where people are able to look to the public markets to find comfort,” he said.  

One example he cited was referring to the public market to analyze the uncertainty of cap rates.   

“There was suddenly a huge amount of uncertainty [around] where cap rates are going, and one of the places people looked to is the public markets – where is the implied cap rate on the major multifamily REITs today, or the implied cap rate on major industrial REITs,” he added.  

Finally, Rosenfeld sees room for alternative lenders to gain market shares.   

“It’s that private credit market that exists in the US that makes the market so dynamic and liquid,” said Rosenfeld, noting when banks have retrenched over the last six to nine months, private credit provided available capital to lend in to the market. “And this is not just real estate, this is across corporate capital markets as well.”